Permian Drilling Costs Surge: Are The Days Of Cheap Oilfield Services Over?

It was only a matter of time before drilling, fracking, and oilfield service providers for the oil and gas industry started raising their prices to reflect the improving prospects for their clients. Now the time has come, and drillers and frackers are asking much higher prices for their services; according to a CNBC report, the cost of fracking per well in some cases shot up by 50 percent between bidding and executing.

We wrote about this last month, when a Wood Mac report warned that 2017 would be tough for oilfield service providers, and things would only start looking up in 2018. Yet, it seems that the rush to the Permian will help relieve many drillers and frackers of their earlier hardships.

The Permian is currently the top spot for shale oil and gas. Everyone is buying acreage there and everyone is optimistic, not least because of the relatively low production costs in the play. These production costs, however, are set for a substantial rise, judging by what some small field operators are saying.

One such operator, Lilis, told CNBC that two months ago it paid $13,900 per day per well for the drilling of two wells in the Delaware Basin, an especially prolific part of the Permian play. Now, the lowest going rate per well is US$16,000 per day. Well-fracking cost US$2.2 million two months ago. Now, the price has gone up to US$3.2 million, Lilis said.

Availability of drilling and fracking crews and equipment is tightening as well, as was to be expected. After months of idling drilling rigs due to the gloomy prospects for oil prices, now the trend is consistently upward, as reported weekly by Baker Hughes. Last week, the firm reported the largest four-week gain in active rigs since April 2014, three months before prices started their inexorable slide. Related: Expensive Middle East Crude Could Lose Market Share To U.S. Shale

For E&Ps these developments are worrisome, as they are still recovering from the oil price crisis and profit prospects are uncertain. Last year, producers boasted how they had managed to bring production costs down thanks to efficiency improvements. These statements drew comments from the oilfield service sector that a lot of the “improvements” were in the form of discount services that drillers and frackers were forced to offer in order to survive.

Now these oilfield service companies, or those among them that made it through the crisis, are back in business with a vengeance: E&Ps will really have to focus on efficiency enhancement, this time at their own expense.

Oil prices are unlikely to climb much further: OPEC has cut but shale producers are expanding and they don’t really have a choice given their debt levels. Global supply is declining but not fast enough, judging by price movements and investor sentiment.

So, producers in the Permian need to come up with alternatives. Some of them are already doing it: choosing smaller oilfield service companies who offer lower rates; going for cheaper fracking methods; or simply drilling fewer wells. Going forward, more options are likely to emerge, as long as there are sufficient cash flows. Automation is an obvious choice in the efficiency-boosting effort, as is the push for new drilling technologies and equipment that provide more attractive return on investment.